Real Estate Law- Chapter 6 Real Estate Contracts

Additions to the Purchase Agreement

-Contingencies

Paragraph 17

Provides that taxes and assessments will be paid current and prorated.

Paragraph 24

Provides that this agreement constitutes joint escrow instructions but that broker's compensation can only be amended with broker's agreement.

Paragraph 27

Reiterates that this is an offer to purchase. Paragraphs requiring initials of parties must be initialed by all parties to be incorporated in the agreement. Seller can continue to offer property until notified of acceptance of any counter offer. If buyer defaults, buyer may be responsible for paying broker commission.

Paragraph 29

Specifies the time limitation for acceptance and provides for buyer's signatures to the offer.

Paragraph 20

Asserts that the sale is in compliance with fair housing laws.

Paragraph 4

Indicates who is responsible for which costs.

Listing Modification

While it's possible for a broker and a principal to enter into a new listing agreement that by its term supersedes an existing listing, it's far simpler to enter a simple modification. Brokers can use an all-purpose addendum form or a specific listing addendum form for this purpose.

Other Listing Forms

-Advance Fee Addendum -Advance Costs -Listing Modification -Loan Broker Listing Agreement -Seller's Net

*Broker's Forms

-Finder's Fee -Cooperating Broker Agreements

"As Is" Clause

-Interim Occupancy Agreement -Counteroffer -Cancellation of Contract -Seller Financing Disclosure Statement -Estimated Buyer's Costs -Mortgage Loan Disclosure Statement

Listings

A listing is an agency contract whereby a principal (usually the property owner) appoints an agent (a real estate broker) to perform some task. Customarily, the principal gives the agent a listing to procure a buyer or lessee for specified property. Listings also can be created for the purpose of locating property for a buyer or obtaining financing. A listing can also be for a loan modification. A agent who is to procure a buyer generally is not given the power to obligate the principal contractually. The agent solicits offers; the principal accepts or rejects them. A buyer's agent locates property for the buyer's consideration. The buyer makes and purchase decision. To be enforceable, listing agreements for real estate must be in writing [Civil Code Section 1624(5)]. The case of Franklin vs. Hansen (1963) 59 C.2d 570 makes it clear that a broker can't enforce a verbal commission agreement. Because listings are contracts, they require all the elements of a valid contract to be enforceable: mutual consent, consideration, legal purpose, and competent parties. Listings must be specific about the subject matter of the agency. They also should be specific about price and terms, if any. If no price is specified, the principal will not be obligated to the agent if the principal refuses an offer at a fair price. If no terms are specified, the principal can refuse a full-price offer is not for cash, and principal will not be obligated to any commission. Listings usually authorize an agent to place a For Sale sign on the property. Without such authorization, the agent doesn't have the right to place a sign. An agent is not entitled to compensation if not provided for in the listing agreement. Authorizing an agent to procure a buyer doesn't imply the the owner will pay a fee if the agent is successful. There can be a gratuitous agency. Unless the listing authorizes the agent to accept a deposit, the agent will have to take deposits as the agent of the buyer.

Loan Broker Listing Agreement

A mortgage loan broker represents a borrower, as his or her agent, to obtain a loan. The agency agreement setting forth the right and obligations of the parties is known as a loan broker listing agreement. Loan brokers' commission and costs on regulated loans are limited by law. Loan brokers' listings can't exceed 45-days when seeking a residential loan of $2,000 or less. A loan broker listing agreement generally allows the broker to work with other agents, provides a safety clause pertaining to loans made after the expiration of the listing, and contains other provisions that are similar to those found in exclusive-right-to-sell listings.

Cooperating Broker Agreements

Agreements between brokers to split commissions are not required by the statute of frauds to be in writing. They deal in dollars and not real estate. To avoid misunderstanding, brokers may enter into written agreements settings forth the commission split. Some cooperating broker fee agreements require that the nonlisting broker identify prospective buyers so that the listing broker can notify the owner of these prospective purchasers (to be protected under the safety clause of the listing). Brokers seldom use these agreements because generally both listing and selling brokers are members of a trade group, such as a multiple-listing service, that enforces commission split agreements.

Paragraph 19

Allows for broker reporting of sale terms to a multiple-listing service (MLS). Without this authorization, such reporting could be a breach of agent's duty of confidentiality.

Finder's Fee

An agent may not pay a commission to an unlicensed party for any act that requires a real estate license. Finder's fees are legal. They're not paid for an act requiring a real estate license; they're paid for a referral or introduction to a buyer, seller, borrower, or lender. Sharing part of a sales commission with an unlicensed person nevertheless is illegal. Oral agreements made with brokers have been enforced on the theory that the broker doesn't need the protection of the statute of frauds. For the protection of both the broker and the finder, a written agreement should be prepared. Generally, in finder's fee agreements, the finder agrees not to participate in or conduct negotiations with prospective clients or to solicit loans on behalf of prospective clients.

Options

An option is a contract to make a contract. The option must clearly show the price if the option is exercised. (The price can be determined by a formula, it can't be ambiguous.) Time is considered to be of the essence in options in that the option must be exercised within the period provided. Generally, option-to-purchase forms provide for the method of exercising the option, include any agreed-on sales terms, and contain provisions for escrow and delivery of title, as well as for brokerage fees. The Standard Option to Purchase Form protects the broker during any extensions to the option as well as for a safety period of one year after the expiration of the option or extensions thereto. Some option forms provide for option extensions upon the payment of additional consideration. An owner can't avoid a commission by giving an option during the listing period that is to be exercised after the listing expires. In California an agent with a listing may also obtain an option to purchase the property. Because the broker is dealing as an agent under the listing and as a principal under the option, a serious conflict of interest arises. Before the option can be exercised, the agent must disclose fully is he or she has an offer, the amount of the offer, and his or her profit. The agent also must obtain the owner's written consent after said disclosure to exercise the option. Because of the serious ethical questions raised by options combined with listings, the authors strongly advise against the use of these agreements.

Paragraph 13

By checking the appropriate block, the offer is either contingent upon the sale of another property or there is no such contingency. If there is a contingency, the addendum allows the seller the right to offer the property for sale and give buyer the opportunity to remove the contingency if seller accepts another offer.

Hold Harmless Clause

Customarily are included in listings. The owner agrees to hold the agent harmless and indemnify the agent for losses in the event the owner fails to provide a disclosure or fails to provide correct information. Such a clause probably wouldn't entitle the broker to recover a loss if he or she knew, or should have known, an owner was mistaken. Like most contracts, listings usually provide that, in the event of legal action, the prevailing party will be entitled to legal fees. Unless a listing authorizes an agent to employ subagents, the agent has no authority to do so. An agency is a personal relationship that requires consent, and the principal is responsible for the acts of the agent within the scope of the agency. The agent therefore has no authority to expand the liability of the principal to acts of subagents without the express authority of the principal. The CAR listing form doesn't provide for subagency but provides for cooperation with other brokers. The listing agreement is between the principal and the agent and can't be enforced by third parties. Ex. A prospective buyer couldn't force an owner to accept an offer at a property's listed price because no privity of contract (contractual relationship) exists between the owner and the prospective buyer. The agent might be entitled to a commission. An exception would be refusal of the owner to accept an offer on the terms of the listing because of unlawful discrimination. If the consumption of a sale is prevented by the default of the agent's principal or by the principal's inability to convey marketable title, the sales agent will be entitled to a commission because the agent fully performed as required by the agency. The burden of proof of performance is on the agent. To collect a commission, the agent must show full compliance with the agent's obligations according to the contract or the principal's wrongful breach of obligations. The rate or amount of commission may not be preprinted in a listing contract for the sale of a building with one to four residential units. This includes mobile homes. The agreement also must contain the following statement in 10-point boldface type: "Notice: The amount or rate of real estate commissions is not fixed by law. They are set by each Broker individually and may be negotiable between Seller and Broker." You will find this notice on the sample listing agreement. Commission customarily is earned under a valid listing upon the execution of a valid purchase agreement unless conditions remain to be fulfilled. The commission normally is paid upon close of escrow, which could be some time after the commission is earned. If a listing requires consummation of the sale, the sale must be consummated for the broker to earn commission (no deal-no commission). If in such a case the buyer breaches the contract and the owner doesn't pursue legal remedies for the breach, the broker gets nothing. If the owner breaches the agreement, the broker is entitled to a commission because the principal's actions violated the implied condition of good-faith dealings. Similarly, if the buyer's obligation was conditional and the seller prevented the satisfaction of the conditions, the broker would be entitled to his or her commission.

Paragraph 1

Defines the form as an offer from offeror, describes the property, sets the purchase price, and specifies the closing time.

Advance Costs

Differs from advance fees in that they are paid to the agent to cover cash outlays in carrying out the agency. They are not intended to cover brokerage fees or general overhead expenses. Ex. If an owner wanted an expensive ad in the Wall Street Journal, the broker might require cost in advance. Moneis collected to cover advance costs must be treated as trust money and must be placed in the broker's trust account. The trust fund remains the property of the principal until disbursed by the agent for the principal. The broker must provide the principal with a quarterly accounting of all disbursements, and any remaining funds must be returned to the principal at the expiration of the agreement along with a final accounting.

Paragraph 5

Includes buyer's intentions to occupy premises as a principal residence (see Paragraph 25 Liquidated Damages), when possession shall be given, if tenant occupied, providing assignable warranties as well as keys and other openers.

Paragraph 25

Limits liquidated damages to 3% of purchase price in the event of buyer default. The limitation only applies where buyer intended to occupy the premises as a principal residence (1-4 units) and both parties initialed this paragraph. Note: If the purchaser can show the amount retain is unreasonable, the court can reduce or eliminate liquidated damages. (Ex, An immediate sale to another party at a greater price.)

Exclusive Listings

Most listings are exclusive listings, in which the owner makes the agent his or her exclusive agent to procure a buyer and agrees to pay a commission should the agent succeed. The agent promises to use due diligence in procuring a buyer. This mutual exchange of promises makes exclusive listings bilateral contracts. Exclusive listings must be signed by the owner. While the signature of one spouse alone on any listing is sufficient to obligate the community property to a commission, both spouses must sign the deed to sell community property. A spouse who has signed the listing will be less likely to refuse to convey; therefore, the signatures of both spouses are desirable. Agents are required to give a copy of an exclusive listing to the owners at the time they sign. Failure to do so doesn't void the listing, but it does subject the agent to disciplinary action. Listings normally include a statement above the principal's signature that the principal acknowledges having received a copy of the listing. This acknowledgment serves as protection against later claims by principals that they hadn't received a copy as required. Exclusive listings must have a definite termination date. Starting that the listing shall expire within a stated period after a notice is given to terminate is not enough. In the absence of a definite termination date, the listing can be terminated by the owner without notice, provided the owner has not benefited from the listing by a sale. The absence of a termination date on an exclusive listing also subjects the agent to disciplinary action that could include suspension or revocation of his or her license. Exclusive listings generally provide that if the seller cancels the listings, leases, or rents the property without the approval of the agent, or otherwise adversely affects its marketability, the agent is entitled to his or her commission. While owners usually can't cancel an exclusive listing without obligation, courts have held that an owner may properly cancel an exclusive listing if the agent has failed in his or her duty to use good-faith efforts to procure a buyer. There are two types of exclusive sale listings: 1. Exclusive-Right-To-Sell listing 2. Exclusive-Agency listing

Let Listings

Net listings refer to the commission payment only and provide that all money received over a stated or net amount shall be the agent's commission. They are illegal in many states because they create a serious conflict of interest. The agent under a net listing really is dealing more as a principal than as an agent. The agent is closer to being an optionee (with an opinion to buy) than a representative of the owner. Even though net listings are legal in California, agents should be aware that the seller is likely to allege fraud or misrepresentation should the sales price result in a commission that is greater than customary. A net listing doesn't relieve the broker from informing the owner of offers at or less than the list price. When an owner accepts such an offer, the broker is not entitled to a commission. The agent must disclose the amount of his or her net commission prior to or at the time the principal commits to the transaction. Failure to do so could be grounds for disciplinary action. Because of the ethical problems involved with net listings, a net listing form has not been included in this chapter.

Open Listings

Nonexclusive listings; they may be offered to one or more brokers. The broker who earns the commission is the first agent to bring the owner an offer that meets the terms of the listing or that the owner accepts. A sale under one open listing automatically cancels all other open listings. The principal has no duty to notify the agents under other open listings of the sale. An open listing may be simply a note or memorandum that describes the property and states the price wanted and that a stated commission will be paid. The agent need not sign the open listing, but is must be signed by the principal (property owner). The open listing is really a unilateral contract. The agent makes no promise to use diligence to obtain a buyer. By procuring a buyer the agent accepts the owner's promise to pay a commission. Unlike exclusive listings, open listings need not have definite termination date. An owner generally can cancel the open listing at any time without obligation but can't cancel an open listing to avoid paying a commission and then accept the benefits of the agent's efforts by consummating a sale to a buyer procured by the agent. An owner who cancels an open listing in good faith is not obligated to the agent simply because a sale later was made to a buyer whom the agent had contracted. Open listings often lead to disagreements between owners and agents as well as among agents over who was the procuring cause of a sale. Several legal form providers offer open listing forms. An advantage of a formal listing is the broker protection of the safety clause.

Contingencies

Offers to purchase often are contingent on something happening, such as receiving an appraisal for a stated amount or more, obtaining a loan to stated specifications, or the sale or purchase of another property. The most common contingency is an offer contingent on financing. When an offer is contingent on financing, failure of the buyer to use good faith in seeking financing would be a breach of contract. Contingencies can tie up a property for months. To avoid such a situation, the seller would be in a better position if he or she agreed to a contingency. This agreement allows the seller to continue to offer the property. A subsequent offer could be accepted conditioned on the original buyer's waiving his or her contingency within a stated period of time. If the original buyer fails to waive the contingency, his or her offer becomes null and void and the deposit is returned. A contingency can be removed by signing a Removal of Contingency Form. The person who benefits from a contingency can always waive the contingency. Ex. If an offer were contingent on an appraisal of $100,000 by a lender, the offeror could waive this contingency and go ahead with the purchase if the appraisal can in for a lower amount. The refusal to waive a contingency that can't be corrected would end the agreement.

Paragraph 22

Provides definition of terms used.

Paragraph 16

Provides for a final inspection of the property prior to close of escrow to determine if the property has been maintained and that the seller has complete agreed-upon repairs and complied with other obligations.

Paragraph 23

Provides for broker compensation from seller or buyer (where broker represents buyer).

Paragraph 3

Provides for initial and increased deposits, financing contingency and terms of loans, appraisal contingency, and other finance terms. By checking the appropriate block, the offer can be made without a loan contingency.

Paragraph 18

Provides that brokers don't guarantee performance of any service provider referred by a broker or any other party. Parties may choose any service providers.

Paragraph 12

Provides that buyer shall receive a grant deed, preliminary title report, and homeowners' policy of title insurance. Seller must also disclose all known matters affecting title.

Paragraph 8

Provides that fixtures and fittings shall remain with the property (free of liens), as well as additional items to be included with the sale or items to be excluded from the sale.

Paragraph 21

Provides that in the event of any legal action or arbitration, the prevailing party shall be entitled to reasonable attorney fees (this paragraph also serves to reduce the likelihood of frivolous lawsuits).

Paragraph 15

Provides that seller repairs shall be prior to final verification of condition and work will be done properly and in accordance with applicable law.

Paragraph 28

Provides that time is of the essence for all performance, that this agreement is the final and complete expression of this agreement and may not be contradicted by a prior or contemporaneous oral agreement, and that if any portion is invalid, the remaining portion remain valid. Extension modifications, alterations, and changes require the signature of both buyer and seller.

Paragraph 14

Provides time periods for removal of contingencies as well as cancellation rights. In the event of cancellation, release of funds requires mutual agreement. If a party refuses to release funds when there is no good-faith dispute, the party may be subject to $1,000 in civil damages.

Paragraph 2

Reiterates the agency disclosure and confirms the agency of the listing and selling agent.

Seller's Net

Sellers don't understand the effect of escrow costs, prorations, prepayment penalties, title insurance costs, seller's points, and other matters. Surprises can result in sellers refusing to sell, filing a complaint against the agent, and even suing the agent. Estimated Seller's Net Sheet forms are available that allow the agent to estimate seller's actual net after loans, liens, costs, and fees are deducted from the sale price. An Estimated Seller's Net Sheet form can be used at the time a listing is taken, when an offer is received, or in preparing a counteroffer. The more open an agent is in his or her dealings, the less chance the agent has of creating animosity and/or being sued by a party to a transaction.

Paragraph 10

Sets forth buyer's right to conduct inspections and tests and states that utilities shall be on for the inspection. Buyer agrees to indemnify seller for any damage or injury resulting from the inspection as well as to keep the property free of liens from work or inspection.

Paragraph 7

Sets forth disclosures required if the property is in a common interest subdivision.

Paragraph 9

Sets forth that the property is sold in its present condition, it will be maintained, and personal property and trash will be removed by close of escrow. The paragraph reiterates that the seller will disclose known material facts and defects. The seller's right to inspect and request for repairs is also set forth. If the seller refuses or is unable to make repairs, the buyer has cancellation rights. The buyer is strongly advised to conduct an inspection, as the seller may not be aware of all problems.

Paragraph 11

Sets forth the disclosures that the seller shall provide.

*Real Estate Purchase Contract

The California Association of Realtors (CAR) has prepared several real estate purchase contract forms. We have included a California Residential Purchase Agreement and Joint Escrow Instructions (RPA-CA REVISED 4/10). This form provides for most contingencies and avoids the necessity of agent-drafted provisions for most contingencies and avoids the necessity of agent-drafted provisions that might not clearly reflect the intentions of the parties. The form also serves as joint escrow instructions. The following are comments on the paragraphs to aid in your understanding of the purpose and applications of the provisions of this contract. Paragraph 1 through 30 The CAR form includes a confirmation of acceptance and agreement if the broker is to pay cooperating broker compensation. The escrow holder acknowledges receipt of agreement and deposit. If a purchase offer fails to provide a period for acceptance, the offer will terminate after the expiration of a "reasonable period of time." Because an offeror normally doesn't receive consideration to keep an offer open, the offer can be withdrawn by the offeror any time prior to acceptance even if the offeror agreed to keep the offer open for a stated period of time.

Buyer Listings

The agent can represent the buyer only rather than the seller. A buyer listing, like a listing from owners, can be exclusive: the broker has the sole right to locate property for a buyer. In a buyer exclusive-agency listing, the buyer can locate property for himself or herself, but the broker is the exclusive agent. In an open-buyer listing, the broker is given nonexclusive authorization to locate property. Like a seller's listing, a buyer's listing, to be enforceable, must be in writing and signed to satisfy the statute of frauds. An oral agreement by a buyer to pay a commission is unenforceable. Like a seller's listing, a buyer's listing would authorize the broker to cooperate with other brokers. The terms in the buyer's listing are very similar to those found in the usual listings given by owners. One difference is the fee structure. Buyers' listings for residential property generally provide that the buyer will pay the agent's commission; however, any commission paid to the agent by third parties (commission splits) will be credited against the fee owed by the buyer. Buyer's listings frequently provide a fee for obtaining an option to purchase and another fee when exercised. Buyers' listings sometimes include an hourly fee as well as an advance against expenses.

Procuring Cause

The agent who is the procuring cause of a sale is that agent who initiated an uninterrupted series of events that led to the sale. Under open listings and exclusive-agency listings, an agent who was the procuring cause of the sale is entitled to a commission. If a break in the chain of events occurred, such as failure to contact a prospective buyer for several months or failure to obtain financing, the original agent who failed for lack of diligence or effort generally wouldn't be considered the procuring cause. Simply telling a person about a property or giving a buyer a list in which a property is included would not qualify an agent as a procuring cause. The agent who claims that he or she was the procuring cause has the burden of proof. When the broker's efforts led directly to the buyer and seller getting together, the courts generally will consider the broker to have been the procuring cause. Procuring cause problems often arise when a prospective buyer fails to inform an agent that he or she has already been exposed to a particular property by another agent. An agent who discovers after a sale that the buyer had previous contact with another agent should have the buyer make a written statement about the nature of the contact and the dates, as well as the reason the buyer didn't continue to negotiate with the original agent. If this statement shows that another agent might have a reasonable claim to being the procuring cause, the selling agent should consider negotiating a fair settlement. An owner who has given multiple open listings may assume, unless notified otherwise, that the broker presenting the offer is the procuring cause. The safety clause in a listing appears only to require that the agent introduced the buyer to the property. This is much less than the requirement under procuring cause. Therefore, a broker could be in a better position claiming notification under the safety clause than making a claim as to procuring cause. A prior offer made by the ultimate purchaser has been held to satisfy the notification requirements of the safety clause.

Advance Fee Addendum

The growth of professionalism in real estate has led to a growing acceptance of advance fees. While more common in buyer listings, they also are gaining acceptance in seller listings, especially listings involving larger residential, commercial, or industrial property where a great deal of professional effort and expense will be required prior to a sale. The advance fee addendum usually sets forth specific activities that the agent is to be compensated for, as well as an hourly rate (or set rate) for the compensation. The agreement is very similar to an agreement that an attorney makes with his or her client. The Department of Real Estate requires approval of all advance fee forms (approval doesn't extend to photocopies of approved forms). Any Additions or deletions to an approved from must be submitted to the Department of Real Estate at least 10-days prior to entering into an agreement. Failure to do so could result in disciplinary action. Advance fees must be placed in the broker's trust account until they are earned.

Paragraph 26

The parties agree to mediate any dispute arising from this agreement. Disputes involving brokers shall be mediated if brokers agree to mediation. By initialing the arbitration clause, the parties agree to give up their rights for court litigation and agree to arbitration of disputes if mediation was not successful.

Paragraph 6

The requirements of the Transfer Disclosure Statement, Natural Hazard Disclosures, Subsequent Disclosures, Mello-Roos notice, lead paint, tax withholding, and additional required disclosures, which include the "Megan's Law" disclosure as to the availability of information of known sex offenders in the community.

Paragraph 30

This is seller's acceptance of offer, or it may provide for a counteroffer. Seller warrants ownership and right to accept offer. Seller's acceptance signatures are part of this paragraph.

Exclusive-Agency Listing

Under an exclusive-agency listing, the named broker is the exclusive agent for the owner, and if the listing broker or any other agent procures a purchaser in accordance with the terms of the listing, or any other price and terms the owner might agree to, the agent has earned a commission. The owner can sell the property by himself or herself without any obligation to pay a commission. Exclusive-agency listings usually are entered into when an owner might have one or more prospective buyers. A better arrangement would be to write an exclusive-right-to-sell listing that excludes named individuals for a set period of time. This would expiration of the stated period of time, the exception would be removed. Exclusive-agency listings usually require that the owner notify the agent of any sale and identify the purchasers. They usually also prohibits the owner from offering the property at a lower price than that offered by the agent. Under an exclusive-agency listing, the owner might be encouraged to subvert the agent's efforts. Problem arise as to who really was the procuring cause of a sale when the agent had contact with the owner's buyer. Because of the possible problems of exclusive-agency listings, many brokers refuse to accept them.

Oral Listings

While listings of real property are required to be in writing to be enforceable, one exception may exist. If, after a listing expires, the owner encourages the broker to continue to work on the sale of the property, the owner may have waived his or her rights to claim the statute of frauds as a defense against paying a commission. The doctrine of estoppel might apply.

Exclusive Authorization and Right-To-Sell Listing

With an exclusive authorization and right-to-sell listing, the owner agrees to pay a commission to an agent if the agent, any other agent, or the owner procures a buyer in accordance with the price and terms of the listing, or for any other price or terms that the owner accepts. The broker will not be entitled to a commission if the buyer located lacks the financial ability to complete the purchase because the broker has failed to procure a ready, willing, and able buyer. Because the listing agent earns a commission no matter who sells the property, this is the most desirable listing for brokers. Exclusive-right-to-sell listings frequently contain a safety clause. This clause customarily provides that the owner is obligated to pay a commission if a sale is made within a stated period after expiration of the listing to any person the agent negotiated with and whose name was furnished in writing to the owner within three days after the expiration of the listing. Sometimes, these clauses provide that in the event another listing is entered into, the owner no longer is obligated under the safety clause. Without such an exception, an owner could be obligated to pay more than one commission. Notice the safety clause, paragraph 4.A.2, in the listing agreement. Often the rules of a local board of Realtors have the effect of a safety clause on subsequent listings. Paragraph 12 covers keybox authorization, and the owner is advised to obtain appropriate insurance coverage. If an agent recommends a keybox without any warnings to the owner, conceivably the agent could be held liable for any resulting loss. Paragraph 14-B provides that by initialing, the parties agree to arbitration of any disputes arising from the agreement (mandatory arbitration).